Answer to Question #144097 in Economics for faizan

Question

a. The shareholder of Al-Karam wants to maximize his profits by selling his goods in the larger quantities. In order to achieve his target (s) he hired a manager to look after his business. However, the manager instead of maximizing business profits started maximizing his own interest by selling the designs in black to the competitor’s designers. Analyze the above situation and explain the possible problem that might occur for Al-Karam.

b. Sahar is analyzing the probability to open her own beauty salon. If she chooses to operate her own salon she would have to pay Rs. 70,000 p.m as rent and staff that would cost her Rs. 30,000 p.m and is expected to earn Rs. 150,000 p.m. While if she continues working as the head makeup artist in one of renowned salons of Karachi she would earn 120,000. Analyze the information above and find explicit and implicit cost

Answer 1

a. To maximize profits the firm should produce such quantity, at which marginal revenue equals marginal cost. In this situation profits are not maximized, besides his profits may even decrease, if the firm produces more than profit-maximizing quantity is.

b. Explicit cost is: 70,000 + 30,000 = 100,000.

Implicit cost is 120,000.

So, if we count both explicit and implicit costs, then the total economic profit will be negative.